Expected Value: Why Poker Players Make Great Entrepreneurs

Ever wonder why a disproportionate amount poker players go on to become great entrepreneurs? It’s because they understand one simple principle: expected value.

Amateurs see luck, poker players understand expected value

When it comes to the way systems and probabilities work in the modern world, our intuition is poor at best. We are genetically prone to making bad decisions. I outlined this in a previous post (here and here).

Think about your friends who only play poker recreationally. They (amateurs) see poker as a game of luck, many non-entrepreneurs see entrepreneurial success as luck as well. They think people that have prosperous businesses just got lucky and were “overnight successes”. They don’t see the years of work, skill acquisition, and relationships that the entrepreneurs built up.

They also typically haven’t been exposed to a simple, yet powerful concept: expected value.

Expected Value

Professional poker players are remarkably consistent in their earnings. What looks random from the amateur’s perspective is, from the professionals angel, quite predictable.

It’s normal for poker players to lose a hand worth thousands of dollars, but be happy about how they played it. They understood what the probabilities were and bet accordingly.

How it works

If you pay $1,000, then you have a 20% chance to win $20,000. That is, you pay $1,000 for an expected value of $4,000 (20% x $20,000 = $4,000). If it isn’t the card you need, that’s unfortunately. But, it doesn’t mean you shouldn’t have bet the way you did. If you were faced with the same situation on hundred times and bet the same each time, you would obviously invest. The large number of instances would make it all but certain that in sum, you would come out ahead. Paying $1000 to get $4000 is a straightforward proposition.

Expected Value is the sum of all possible values for a random variable, each value multiplied by tis probability of occurrence. It’s what poker players use to make betting decisions and it’s how entrepreneurs think about their businesses and decisions.

Billy Murphy (who most of you know), a former professional poker player turned entrepreneur, explains a scenario that a prospective entrepreneur might face in his essay Expected Value: Millionaires’ Math.

Example

Suppose you have $30,000 saved up and are debating between getting a job or starting a commerce store. You could simply evaluate the expected value of each.

The typical way someone approaches this might be: “If I get a job, I can make $50,000/year. If I start a store I could potentially make more, but it’s also risky.” They nver specifically quantify the outcomes, leading to poor decisions.

Let’s apply some numbers. If you go out and get a job, you may make $50,000, but if you start a store, the expected value may be $95,000 based on industry averages of estimated earnings and the added value of the asset, because all profits of a business you own are worth a multiple. Unlike a job, a business has potentially unlimited upside and you control the variables.

If the store doesn’t work out, then you have $30,000 in living expenses which will still cover you for 15 months until you’d need to find a job. If the store starts to make money, that will buy you more time.

Quantify outcomes and jump

As soon as you quantify the outcomes, it changes the decision. Even if the expected value option doesn’t pan out, you can always go back to the job. The worst case scenario is you’ve acquired a valuable new skill set to put on your resume.

While no individual opportunity is guaranteed to pan out, systematically pursuing opportunities with a positive expected value means you’re going to find success over time.

You’ll all make great entrepreneurs

We encourage you to use your heightened thinking and take the leap into entrepreneurship. If we do one thing at the Lodden Thinks blog, it’s to encourage yo uto do just that.

In the meantime, don’t forget to go play the game that will get you there: Lodden Thinks.
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*Post adapted from The End of Jobs: Money, Meaning, and Freedom Without the 9-to-5 by Taylor Pearson*

Originally published at loddenthinksblog.com on February 10, 2016.